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Intel Reports Earnings Drop as Its Industry Changes

Brian Krzanich, Intel’s chief, with prototypes using his company’s new processor. Intel is rushing to refocus on mobile and Internet-based computing.Credit
Intel

SAN FRANCISCO — This used to be Intel’s world. Now Intel just lives in it, hopefully at a solid profit.

Intel, the world’s largest maker of semiconductors, once dictated, by the speed and power of the chips it supplied for personal computers and computer servers, how a significant chunk of the technology industry worked. Things like how much complexity a software program could reasonably incorporate, how quickly and beautifully a video game animated, or how long a laptop’s battery lasted were largely up to Intel because its chips were in so many products.

And when Intel reported its quarterly results, investors took those returns, good or bad, as an indication of how the rest of the tech industry would fare in the coming months.

No more. As consumers migrate to smartphones, tablets and cloud-based computing systems, where one server does the work of several and software is distributed over the Internet, Intel is looking less like an industry bellwether and more like an indicator of how an older generation of tech companies is struggling to keep pace. In its place, consumer-oriented companies like Google, Apple and Samsung are increasingly better indicators of overall tech spending.

“The challenge for Intel is the challenge for all the older tech companies: the markets keep changing,” said Martin Reynolds, an analyst with Gartner. While even a few years ago Intel could count on selling the chips that run $1,000 PCs, he noted, “now you can go to 7-Eleven and find a prepaid phone with a touch screen for $79. By the time Intel succeeds in mobile, the growth may be out of that market.”

Intel reported earnings on Tuesday that were slightly lower than the same quarter a year ago, reflecting a drop in demand for personal computers.

The company reported that net income in the third quarter was $2.95 billion, or 58 cents a share, just a bit below the year-ago quarter. Revenue was slightly higher, at $13.5 billion.

“We are executing on our strategy to offer an increasingly broad and diverse product portfolio,” Brian M. Krzanich, Intel’s chief executive, said in a statement. He called the quarter “modest growth in a tough environment.”

The net income was above the expectations of Wall Street analysts. They had expected 53 cents a share and revenue of $13.47 billion, according to a survey of analysts by Thomson Reuters. Shares fell in after-hours trading, however, based on a fourth-quarter forecast from Intel that was below expectations.

While Intel is hardly a company on the ropes, the continued malaise around its quarterly results is another indication that the companies that were on top of tech over the last two decades are, increasingly, not so dominant. The recent annual revenue from the tech incumbents Cisco, Hewlett-Packard, Microsoft, I.B.M. and Intel, for example, was a collective $401 billion. For Apple, Google and Samsung, the number was $349 billion. The three also had faster growth over all than the other five companies.

“All of the hardware companies have to find ways to bring value in a world where a lot of the innovating is done in software and services,” said Bobby Burleson, an analyst with Canaccord Genuity. “They weren’t the ones to define the new computing reality. The world is dominated by Google and Apple.” Other companies, he said, “can live in it, but they have to pay a toll.”

Intel, based in Santa Clara, Calif., has long dominated the market for PCs and computer servers, but was slow to move into mobile devices like smartphones and tablets. Mr. Krzanich, who took over last spring, has said that he is taking steps to fix the problem, but that results will take time. Intel has been working closely with Google on hardware, and has purchased companies that will enable its chips to work better with cloud-based software.

Mr. Krzanich has warned, however, that Intel is still perhaps 18 months from being able to respond more quickly to market shifts.

Being late has already cost Intel. When an app is downloaded to a phone, it is likely to come from the stores of Google or Apple and run on a device with chips from Samsung, Qualcomm and Nvidia, rather than Intel. Intel chips are in many cloud computing servers, but with generally lower profit margins.

It is a problem faced by many of the big business technology firms that were slow to catch the tech industry’s latest shift. Decades of skilled engineering and complex sales efforts — along with the big costs that go with them — are less important than they were in the past. Products from I.B.M. or H.P. were years in the making; products from Facebook can be cooked up in overnight hackathons.

Many of the older tech companies are trying to shift gears and sometimes compete with their old partners. I.B.M., which reports its own quarterly results on Wednesday, is widely rumored to be looking at a sale of its server business, so it can concentrate on cloud-based software and services. (An I.B.M. spokeswoman said the company did not comment on rumors.)

Steven A. Ballmer, Microsoft’s chief executive, has announced his retirement as his company looks for ways to catch up with mobile customers. Cisco, which is pitching itself as the computer networking center of a sensor-rich “Internet of things,” has experienced years of declining profit margins.

Last week, Meg Whitman, the chief executive of H.P., called the changes to her company “very tough and very real,” adding that “current partners like Intel and Microsoft are turning from partners to outright competitors.”

A version of this article appears in print on October 16, 2013, on page B3 of the New York edition with the headline: Intel Reports Earnings Drop as Its Industry Changes. Order Reprints|Today's Paper|Subscribe